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ASSURANCE SERVICES
MULTIPLE CHOICE
1. Assurance services
a. Include tax services, compliance audits, and review engagements.
b. Are contracts in which the assuror reports on or improves the quality of the information.
c. Are offered only by members of the American Institute of Certified Public Accountants.
d. Are contracts in which one party makes recommendations on how another party might use
information.
ANS: B
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10. Which of the following criteria is unique to the independent auditor's attest function?
a. Independence.
b. Familiarity with the particular industry of each client.
c. Due professional care.
d. General competence.
ANS: A OBJ: (AICPA ADAPTED)
13. The first authoritative audit standards-setting body empowered to issue auditing pronouncements in
the U.S. was the
a. The Committee on Auditing Procedure.
b. The Auditing Standards Executive Committee.
c. The Auditing Standards Board.
d. The Accounting and Review Services Committee.
ANS: A
14. Which of the following incorrectly matches the authoritative body with its authoritative
pronouncements?
a. Accounting and Review Services Committee: "Statements on Standards for Accounting
and Review Services"
b. Auditing Standards Board: "Statements on Auditing Standards"
c. Auditing Standards Executive Committee: "Statements on Auditing Procedure"
d. Securities and Exchange Commission: "Financial Reporting Releases"
ANS: C
21. The purpose of a compliance audit for a governmental entity is to determine whether
a. Financial statements comply with GAAP and whether the entity is operating efficiently.
b. Financial statements comply with GAAP and the entity has complied with applicable laws
and regulations.
c. The entity has complied with applicable laws and regulations.
d. Financial statements comply with GAAP.
ANS: B
23. Which statement below concerning assurance services and consulting services is not true?
a. Assurance services may be performed by independent nonprofit institutions, public
accounting firms, or consulting firms.
b. Consulting services recommend uses for information.
c. Assurance services report on or improve the quality of information.
d. Consulting services involve reporting on the quality of written assertions made by the
client.
ANS: D
AN INTRODUCTION TO AUDIT AND OTHER ASSURANCE SERVICES 5
ESSAY
1. Define auditing.
ANS:
Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions
about economic actions and events to ascertain the degree of correspondence between those assertions
and established criteria and communicating the results to interested users.
ANS:
Financial statement audits reduce information risk (the risk that information in financial statements is
misstated materially). In turn, lowering information risk reduces a company's cost of capital (the cost
a company incurs to issue equity or debt instruments).
3. Describe two attestation services that are common performed by public accounting firms.
ANS:
(1) Agreed-upon procedures: An engagement in which the attester (or auditing firm) examines
an item using procedures agreed upon by the contracting parties.
(2) Reviews: An attestation service for financial statements in which the public accounting firm
provides limited assurance about whether an entity's financial statements conform to generally
accept accounting principles.
4. What regulation is in place to monitor the performance of public accounting firms performing audits
of public companies?
ANS:
The Sarbanes-Oxley Act assigns responsibility to the Public Company Accounting Oversight Board to
regulate public accounting firms, which perform audits of public companies. The PCAOB has the
authority to fine, censure, suspend, or bar from practice firms that violate the Sarbanes-Oxley Act or
standards issued by the PCAOB.
PROBLEM
1. In your role of Chief Financial Officer, you have been requested to explain to the Board of Directors
why audits of the company are performed by (a) internal auditors, (b) independent auditors, and (c)
governmental auditors. The Board believes that the company's internal auditors should perform all
audits of the company. What are the issues that you will explain to the Board?
ANS:
It is important to explain the differences in the roles of the three types of auditors and the purpose of
each different form of audit:
I. Internal auditors are auditors employed by the company to assess the efficiency and
effectiveness of management's operations. Internal auditors perform operational audits.
Operational audits focus on information systems and operating procedures, not on
recorded dollar amounts or reported financial information. Operational audits may
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It is imperative that the Board of Directors understands that the different types of auditors have
different areas of professional expertise and authority and that the different types of audits serve
different purposes.
2. The AICPA's "CPA Vision Project: 2011 and Beyond," contemplates values and competencies that
improve an assurer's ability to judge the quality of information assured. List and define the Core
Values, Competencies, and Services outlined within the CPA Vision Project.
ANS:
I. Core Values:
TRUE/FALSE
1. The Auditing Standards Board issues authoritative pronouncements for public company audits.
ANS: F
The PCAOB issues such pronouncements.
2. The Securities and Exchange Commission is a federal agency, which regulates the registration and
exchange of securities under the Securities Acts of 1933 and 1934.
ANS: T
The SEC regulates such activities.
3. A compliance audit is typically performed for governmental entities or for contractors, which must
comply with federal requirements.
ANS: T
A compliance audit is most often performed for governmental entities such as municipalities or school
districts and for contractors, which must comply with federal requirements.
ANS: F
A state auditor is a type of governmental auditor.
5. In an agreed-upon procedures engagement, the client might not be the responsible party.
ANS: T
In an agreed-upon procedures engagement, the client might engage the practitioner to report on a
responsible party’s assertion.
6. In an agreed-upon procedures engagement, the assertion of the responsible party must be in writing.
ANS: F
The assertion might be in writing, but does not need to be.
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7. Examples of consulting services include reviews of financial statements and agreed-upon procedures
engagements.
ANS: F
Reviews and agreed-upon procedures engagements are both types of attestation services.
ANS: T
Objectivity is a Core Value in the AICPA’s CPA Vision Project: 2011 and Beyond.
ANS: F
The Board of Directors is the client in the audit of a public company.
10. Internal auditors should report to the audit committee of the board of directors to be most effective.
ANS: T
Reporting to the audit committee of the board of directors helps to assure independence from the
activities being examined.
MATCHING
a. AICPA f. CAP
b. ARSC g. SEC
c. FASB h. GASB
d. ASB i. IFAC
e. PCAOB j. AAA
1. A global federation of accountants
2. An independent standard-setting body, which issues authoritative standards for governmental entities
3. A senior technical committee of the AICPA, which issues SASs
4. Issues Financial Reporting Releases and Accounting and Auditing Enforcement Releases
5. The body, which issues Statements on Standards for Accounting and Review Services
6. Responsible for setting auditing standards for public company audits
7. Issued Statements on Auditing Procedure from 1939-1972
8. A professional trade association of CPAs
9. An organization of accounting educators
10. Issues Statements of Financial Accounting Standards
1. ANS: I
2. ANS: H
3. ANS: D
4. ANS: G
5. ANS: B
6. ANS: E
7. ANS: F
8. ANS: A
AN INTRODUCTION TO AUDIT AND OTHER ASSURANCE SERVICES 9
9. ANS: J
10. ANS: C
SHORT ANSWER
1. Define information risk and explain the impact, which audits have on this risk.
ANS:
Information risk is the risk that information in financial statements is materially misstated. Audits add
value by reducing information risk, thereby reducing the company’s cost of capital.
ANS:
Employees
Management
Employee pension plan participants
Post-retirement benefit plan participants
Dividend and cash investment plan participants
Labor unions
Suppliers
Stock exchanges
Regulatory agencies
Taxing authorities
3. Discuss the responsibility of management versus that of the auditor for the financial statements.
ANS:
The financial statements are the responsibility of management; the information in them is
management’s representations. In contrast, the auditor is responsible for expressing an opinion on the
financial statements of management.